Richard Green is a professor in the Sol Price School of Public Policy and the Marshall School of Business at the University of Southern California.
This blog will feature commentary on the current state of housing, commercial real estate, mortgage finance, and urban development around the world. It may also at times have ruminations about graduate business education.

Sunday, August 05, 2012

Who should be held harmless for deficit reduction?

At some point, once the unemployment rate really starts to fall, the US needs to get on a steady-state path to deficit reduction. A question worth asking is what part of the income distribution should contribute to this reduction. Certainly the one percent should make the major contribution, but it is hard to see how it can close the gap by itself.

The current budget deficit is about $1.3 trillion. According to IRS SOI data for 2009 (the most recent available), households in the top one percent paid income taxes of $318 billion in that year (see Table 5). Because that was an anomalous year, let's go back to 2007, when the top one percent paid the most is had paid under current law, which was $451 billion. If we adjust that for five years of CPI growth, that translates to about $497 billion in current dollars. This means that doubling taxes on the top one percent would get us less than halfway toward closing the budget gap.

Of course, lower unemployment will mean less money going to unemployment insurance, and will add to the number of taxpayers, and these will help reduce the deficit. But the taxing the one percent alone will not be enough--so how low do we go? I would certainly hold the bottom two quintiles harmless--whatever mix of tax and spending changes come along, that group should be left no worse off than before (because they received no net benefit from the policies of the past decade or so). How one divides it up among the rest? I am not sure.

Since nominal GDP was $14 trillion in FY 2007 that would have been about $700 billion back then.

Effective tax rates on the top 1% were considerably higher than just twice as high before the 1970s. Using the 1970 effective tax rates on P99.99, P99.9-99.99, P99.95-99.9 and P99-99.95 from here (Table 3a):

http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf

and the income shares for 2007 from here (Table A3):

http://elsa.berkeley.edu/~saez/TabFig2010.xls

and the tax and income data you just posted, one finds that the top 1% would have paid about (surprise) $700 billion more in taxes.

Yes, Virginia, just raising taxes on the 1% back to where they were during the era of the Treaty of Detroit would solve all our fiscal problems.

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Remember that increasing taxes on the wealthy leads to much higher economic growth rates which provides more income to tax at all levels. The optimal level has been historically demonstrated to be in the range of 60-80% on marginal income. Raising taxes on the wealthy increases income across the board, and that increases tax revenue.

Tax the rich. The rest of us would all be better off except for the disproportionate gains the wealthy have made since the 1970's. From 9 % of the economy, the income of the 1% has grown to over 20%, They have absorbed the greatest portion of the growth of the economy. That is one clear sign they are not being taxed enough. If the trend continues, all growth will be absorbed by the 1%, and then the economy will start into absolute decline, as the depredations of the 1% start to become so burdensome that the rest of the economy cannot sustain them or itself. Piketty and Saez are off to a good start.

The disproportionate share of the growth of the last 40 years enjoyed by the rich is self serving, and contrary to the interests of society as a whole, their propaganda not withstanding.

1 percent will not be enough for sure. But the government should better succeed in getting rid of unemployment first. Who knows how much time is required for that. As people with no job and no money is a big problem today.

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